How GOLD is the perfect insurance from stormy stockmarkets

In times of economic uncertainty, investors have always turned to gold.

It is renowned as a storer of value, the one asset that will consistently ride out soaring prices and volatile stockmarkets. Unlike almost any other commodity, its price isn’t affected by inflation and is not linked to shares.

And if fears over the Chinese economy, a drop in growth of the emerging economies, or prolonged periods of low rates in the U.s. are realised, it could soon be the asset of choice for investors again.

If you own it already — whether through a fund or because you’ve bought jewellery or a gold bar as an investment — then you’re holding an asset that should ride out the good times and the bad.

Currently, though, with the economies of many countries performing well and fears of deflation in the UK, savers have been put off it.

In the midst of the financial crisis in 2011, the price of gold soared to a record high, eventually hitting more than $1,900 an ounce. today, it stands at around $1,176.

that drop has pummelled gold funds, which are down as much as 70 pc over the past three years.

However, when you invest in gold you need to remember that it isn’t about growing your money — it’s about protecting it. It works as a kind of insurance and, as with any insurance, there is a cost to owning it: gold doesn’t pay interest or a dividend, and the money you hold in it is missing out on returns you could get elsewhere.

Figures from BullionVault show that a saver with 10pc of their cash in gold and the rest split between equities and bonds will miss out on the big peaks in the market when times are good. their average annual return from 1975 to 2014 would be 13.7 pc.

For a saver with no gold, that rises to a slightly higher 14.2 pc.

But the investor with the gold would fare better in bad years. In the worst year over that period, they would lose 7.6 pc of their money, whereas the investor with no gold would be down 13.2 pc.

the dilemma is whether it is worth missing out in the good years to have the reassurance that you’ll limit how much you lose in a bad year.

Laith Khalaf, senior investment analyst at Hargreaves Lansdown, says: ‘the events which drive demand for gold are by their nature unpredictable, but it is difficult to see a recurrence of the perfect storm of low interest rates, currency debasement and turmoil in stock markets which propelled it to its 2011 high.’

the prospects for gold largely hinge on what the U.s. Federal Reserve does next — if interest rates go up, it’s likely the price of the metal will come down.

In August, the price of gold sank to $1,085 in anticipation of the Federal Reserve raising U.s. interest rates in september.

When that didn’t happen, it recovered slightly.

Adrian Ash, head of research at BullionVault, says: ‘Gold becomes most attractive when central banks lose credibility. the Federal Reserve has backed itself into a corner where it almost has to raise interest rates in December because it said it would at some point in 2015.

‘If it doesn’t put rates up, it will lose credibility. Or if it puts them up just because it said it would, even though the economy isn’t strong enough to support that, then it will lose credibility, too.’

either of these scenarios could see investors look to gold once more. Interest rates have to go up at some point — they certainly can’t get lower. While they’re at record lows, holding gold protects your wealth, as you can’t earn any interest on cash.

But if cash starts paying interest again, you are effectively losing money by holding on to the gold.

Alastair Baker, multi-asset fund manager at schroders, says: ‘If you want a safe investment, then it makes far more sense to put money into government bonds, because at least they pay a coupon [a regular interest payment].

‘the only reason you would choose gold over gilts is if inflation was high.’

Another concern for investors is China. Its rollercoaster stockmarket has been the main source of volatility over recent weeks.

One of the world’s biggest consumers of commodities and importers of gold, it is feared that if the stockmarket takes a major hit then demand for the precious metal could dry up.

But mr Ash adds: ‘the price of gold is not determined by consumers in China, it is driven by investor sentiment in the City.

‘And it all comes down to what value people put on it as insurance.’